The HTA contract is one that offers the seller of grain the ability to lock in the futures market portion on a cash grain contract. The basis portion of the cash grain contract will be locked in at a later date per contract specifications. This alternative is thus suitable for the seller of grain who feels that futures market prices will fall and basis will improve.
- Allows the seller to lock in what he/she perceives to be a favorable futures market price.
- Provides time during which the seller can price the basis portion of the contract. If the seller of grain feels the basis market will improve, this alternative provides the seller to price the basis portion of the contract at a later date.
- Allows the seller to lock in favorable futures market carry when available.
- Allows the seller the flexibility to roll the contract to a desired shipment date within the same crop year (October through September).
Example: On June 1st, the posted cash bid for October delivery corn is $3.75 and the December futures level is $4.40. The basis level is 65 cents under the December futures. You like the futures level, but think the basis is historically wide and will narrow before you plan to deliver. You enter a HTA contract with Fremar LLC and lock in the $4.40 futures.
- Does not allow the seller to benefit if the futures market rally after the futures portion of the contract is priced.
- Does not lock in the basis portion of the trade. The seller is exposed to a potential basis decline.
- May expose the seller to quality deterioration if the seller has to store grain until a later delivery date.
On October 15th you are getting ready to harvest and Fremar LLC’s basis level is 50 cents under the December futures. You have two options at this point:
- You can lock in the 50 cents under the December futures basis. $4.40 December futures is your original futures price minus the 50 cent basis gives you a cash price of $3.90 for your contract. You deliver the bushels directly to the elevator at harvest.
- You can roll your HTA to a later futures month within the same crop year. You would like to deliver grain against this contract next July and you think basis will improve before then. There is a 25 cent carry from the December to the July futures. You decide to roll to the July futures and leave the basis open, so your futures price becomes $4.40 plus the 25 cent carry equals $4.65. On July 1st, Fremar LLC’s basis is 45 cents under the July futures and you decide to lock in basis. Your cash price is $4.20 (4.65-.45) and you deliver corn to the elevator in July.